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2012 Economic Commentaries

  • Time-Consistent Rules in Monetary and Fiscal Policy


    Daniel R. Carroll

    Abstract

    The intended effects of a government policy can be distorted by the public’s expectations about how strictly it will be enforced. If households and businesses cannot be certain that a policy will remain unchanged over its scheduled tenure, they will adjust their response to it to reflect this uncertainty. One way of mitigating the uncertaintly is to add rules to new policies when they are enacted that would make altering the policies very difficult in the future. Read More

  • Capital Requirements for Financial Firms


    Joseph G. Haubrich James Thomson

    Abstract

    One of the reforms proposed for preventing financial crises is to require financial institutions to hold more capital. There are a number of unresolved issues related to such a requirement, ranging from the costs of increased capital requirements to the best way to structure them. Some of this research was presented at a recent conference, and we discuss the major findings in this&nbsp;<em style="color: #333333; font-family: 'Trebuchet MS', Verdana, Arial, Helvetica, sans-serif; font-size: 13px; background-color: #ffffff;">Commentary</em> Read More

  • Gaps versus Growth Rates in the Taylor Rule


    Charles T. Carlstrom Timothy S. Fuerst

    Abstract

    There are many possible formulations of the Taylor rule. We consider two that use different measures of economic activity to which the Fed could react, the output gap and the growth rate of GDP, and investigate which captures past movements of the fed funds rate more closely. Looking at these rules through the lens of a partial-adjustment Taylor rule, we conclude that the gap rule does a better job of explaining the actual funds rate data, and provides a better rule-of-thumb for understanding historical monetary policy. Read More

  • Policy Rules in Macroeconomic Forecasting Models


    Todd E. Clark

    Abstract

    This Commentary describes how some of the Cleveland Fed&rsquo;s macroeconomic forecasting models have been modified to use a Taylor rule for monetary policy. After briefly describing the Taylor rule implementation, the article shows that the Taylor rule included in one of our models successfully captures the course of monetary policy in the most recent episode of policy tightening.&nbsp; Read More

  • Where Would the Federal Funds Rate Be, If It Could Be Negative?


    Ellis W. Tallman Saeed Zaman

    Abstract

    In the wake of Great Recession, the Federal Reserve engaged in conventional monetary policy actions by reducing the federal funds rate. But soon the rate hit zero, and could go no lower. In such environments, policymakers still think in terms of where the federal funds rate should be, were it possible to go negative. To project the "unconstrained path" of the funds rate&mdash;ignoring the zero lower bound&mdash;and to identify the key underlying shocks driving that path, we employ a statistical macroeconomic forecasting model. We find that the federal funds rate would have been extremely negative during 2009-2010. Read More

  • Alternatives to Libor in Consumer Mortgages


    Mark E. Schweitzer Guhan Venkatu

    Abstract

    Many adjustable rate mortgages in the United States are indexed to Libor. While the accuracy of this rate has recently been called into question, another issue affecting U.S. borrowers has become evident since the onset of the financial crisis. Specifically, many U.S. consumers with Libor-based loans may have been hit with substantially higher payments when their loans reset during the financial crisis than if those loans had been tied to a Treasury rate. We investigate several alternative reference rates for consumer loans and estimate their payment effects on a large sample of Libor-linked U.S. mortgages. We find that these alternatives would have delivered savings over Libor of about $25 to $45 per month and substantially more for mortgages that reset in October 2008. Read More

  • Labor’s Declining Share of Income and Rising Inequality


    Margaret Jacobson Filippo Occhino

    Abstract

    Labor income has been declining as a share of total income earned in the United States for the past three decades. We look at the past effect of the labor share decline on income inequality, and we study the likely future path of the labor share and its implications for inequality. Read More

  • Household Formation and the Great Recession


    Timothy Dunne

    Abstract

    During the Great Recession, the rate at which Americans formed households fell sharply. Though the rate has recently picked up, it isn&rsquo;t fast enough to make up for the shortfall in household formation that occurred over the last several years. An analysis of recent household formation patterns shows that the greatest shortfall occurred among young adults and that it is related to weak economic conditions. Housing choices have shifted as well, with a greater proportion of young households living in rental housing rather than owner-occupied homes. Read More

  • Americans Cut Their Debt


    Yuliya Demyanyk Matthew Koepke

    Abstract

    The Great Recession brought an end to a 20-year expansion of consumer debt. In its wake is a lively debate about what caused the turnaround. Was it motivated by a decreased appetite for debt by consumers or an unwillingness to lend by banks? Our analysis of Equifax and Mail Monitor data shows that the major cause was most likely consumers. Read More

  • The College Wage Premium


    Jonathan James

    Abstract

    The return on educational investments has risen substantially in the past 30 years. While the primary focus has been on the college wage premium, new evidence shows that the value of going to college is affected by a host of other important educational decisions, each of which has a potential large effect on future earnings. This&nbsp;<em style="color: #333333; font-family: 'Trebuchet MS', Verdana, Arial, Helvetica, sans-serif; font-size: 13px; background-color: #ffffff;">Commentary</em>&nbsp;examines the impact of two of these other decisions on earnings: the choice of a college major and the pursuit of an advanced degree. In some cases, differences in the college major premium are as large as the college wage premium itself. Read More

  • Communication, Credibility, and Price Stability: Lessons Learned from Japan


    Owen F. Humpage

    Abstract

    Over the past couple of decades, central banks have been taking steps to increase the transparency of their monetary policies through clearer communications with the public. While there are many differences between the economic challenges Japan has been struggling with in the past decade and those facing U.S. and European central bankers now, we can learn a great deal about combating deflation from Japan&rsquo;s experiences. Read More

  • An Unstable Okun’s Law, Not the Best Rule of Thumb


    Brent Meyer Murat Tasci

    Abstract

    Okun&rsquo;s law is a statistical relationship between unemployment and GDP that is widely used as a rule of thumb for assessing the unemployment rate&mdash;why it might be at a certain level or where it might be headed, for example. Unfortunately, the Okun&rsquo;s law relationship is not stable over time, which makes it potentially misleading as a rule of thumb. Read More

  • Technology Shocks and Unemployment in the Last Recession


    Pedro S. Amaral

    Abstract

    In the latest recession, unemployment rates in the United States increased at a faster pace than in the average OECD country. Since the unemployment rate has been more sensitive to technological shocks in the United States in the past than in other OECD countries, I investigated whether increased sensitivity to such shocks was the reason for the recent relative increase in the U.S. unemployment rate. I find this was not the case Read More

  • 10 Things to Know About the Shape of Ohio's Skilled Workforce


    Timothy Dunne Guhan Venkatu

    Abstract

    A region&rsquo;s economic performance is closely linked to the skills and knowledge of its workforce. Using college attainment as a measure of workforce skills, we examine overall trends in higher education to get a sense of where Ohio stands relative to other states. The data reveal that Ohio has made some progress, especially in improving educational attainment in its younger workers. At the same time, Ohio lags in a number of other dimensions, in particular, in its overall level of college attainment and in attracting educated workers into the state. Read More

  • Exchange-Traded Funds


    O. Emre Ergungor

    Abstract

    ETFs are one of the most successful financial innovations of the last few decades. As a new, rapidly growing, and increasingly complex financial instrument, ETFs might raise concerns about the risk they pose to financial stability. While they do not seem to pose a threat at this time, ETFs did expose a weakness in U.S. stock markets during the Flash Crash of 2010: the fragmented nature of trading, which can leave some markets very shallow. Read More

  • The Cleveland Financial Stress Index: A Tool for Monitoring Financial Stability


    Timothy Bianco Mikhail V. Oet Stephen Ong

    Abstract

    To promote stability in a dynamic financial system, supervisors must monitor the system for risks at all times. The Cleveland Fed has developed an index of financial stress, the CFSI, which is designed to track distress in the financial system as it is building. The CFSI will help financial system supervisors monitor and understand the state of financial markets on a real-time basis, and take appropriate regulatory or supervisory action as necessary. Read More

  • Overvaluing Residential Properties and the Glut of REO


    Thomas J. Fitzpatrick IV Stephan D. Whitaker

    Abstract

    Swelling REO inventories are the latest fallout of the housing crisis, costing lenders money and contributing to neighborhood blight. Yet lenders could avoid taking on so much REO if they could more accurately estimate the value of the homes they foreclose on, especially in weak housing markets. Correcting this apparent misunderstanding of the market could speed the clearing of REO inventories, save lenders money, and help stabilize housing markets. Read More

  • Do Rising Rents Complicate Inflation Assessment?


    Brent Meyer

    Abstract

    In the face of falling house prices, decreasing rates of homeownership, and a glut of vacant homes, the Consumer Price Index&rsquo;s measure of the cost of owner-occupied housing&mdash;owners&rsquo; equivalent rent of residences (OER)&mdash;has begun to accelerate, rising at an annualized rate of 2.3 percent over the past six months. Given a backdrop of generally subdued underlying inflation elsewhere in the index, a persistent increase in the relative price of OER&mdash;the largest component of the consumer market basket by far&mdash;may create upward pressure on measured inflation. Read More

  • The History and Rationale for a Separate Bank Resolution Process


    Thomas J. Fitzpatrick IV Moira Kearney-Marks James Thomson

    Abstract

    Everyone recognizes the need to have a credible resolution regime in place for financial companies whose failure could harm the entire financial system, but people disagree about which regime is best. The emergence of the parallel banking system has led policymakers to reconsider the dividing line between firms that should be resolved in bankruptcy and firms that should be subject to a special resolution regime. A look at the history of insolvency resolution in this country suggests that a blended approach is worth considering. Activities that have potential systemic impact might be best handled administratively, while all other claims could be dealt with under a court-supervised resolution. Read More